UNIVERSITA’ DEGLI STUDI DI PADOVA
DIPARTIMENTO DI SCIENZE ECONOMICHE E AZIENDALI
“MARCO FANNO”
CORSO DI LAUREA MAGISTRALE IN ECONOMIA INTERNAZIONALE
LM-56 Classe delle lauree magistrali in SCIENZE DELL’ECONOMIA
Tesi di laurea
PREDICTORS OF CORPORATE ENVIRONMENTAL
STRATEGY: THE ROLE OF ENVIRONMENTAL
ACCOUNTING SYSTEMS AND MANAGERIAL
PERCEPTION
Relatore:
Prof. CUGINI ANTONELLA
Co-Relatore:
Dott. DERCHI GIOVANNI BATTISTA
Laureando:
ROMAGNOLI GIULIA
Il candidato dichiara che il presente lavoro è originale e non è già stato sottoposto, in tutto o in parte, per il conseguimento di un titolo accademico in altre Università italiane o straniere.
Il candidato dichiara altresì che tutti i materiali utilizzati durante la preparazione dell’elaborato sono stati indicati nel testo e nella sezione “Riferimenti bibliografici” e che le eventuali citazioni testuali sono individuabili attraverso l’esplicito richiamo alla pubblicazione originale.
Firma dello studente
INDEX
Abstract ... 1
Introduction ... 2
1. Environmental Accounting and Strategic Issue Management: an Innovative Interplay to Manage the Environmental Variable ... 6
1.1. Companies and Sustainable Development: the Rising of Environmental Accounting .. 6
1.1.1. Environmental Management Accounting: State of the Art and Future Potential... 11
1.1.2. Environmental Reporting: State of the Art and Future Potential ... 16
1.2. Strategic Issue Management: How Cognitive Categorizations Affect Organizational Decision Making ... 22
1.2.1. The Starting Point of Strategic Issue Management: Categorization Theory ... 23
1.2.2. Linking Cognitive Categorization to Organizational Decision Making: Strategic Issue Management ... 25
2. The Effects of Environmental Accounting and Managerial Interpretation on Corporate Environmental Strategy: Research Hypothesis Setting ... 29
2.1. Determinants of Environmental Strategy ... 34
2.1.1. Managerial Perception of the Environmental Issue ... 36
2.2. Determinants of Managerial Perception of the Environmental Issue ... 39
2.2.1. Issue Legitimation ... 40
2.2.1.1. Environmental Strategic Planning ... 42
2.2.1.2. Board-Level Environmental Accountability ... 44
2.2.1.3. Environmental Target Setting ... 45
2.2.1.4. Environmental Risk Management ... 48
2.2.1.5. Environmental Disclosure ... 50
2.2.1.6. ISO 14000 ... 55
2.2.2. Environmental Employees Incentive System ... 57
3. Research Sample and Measurement of Constructs ... 63
3.1. Sample ... 63
3.2. Measurement of Constructs ... 68
3.2.1. Dependent Variables ... 68
3.2.1.1. Environmental Strategy: Environmental Initiatives Implementation ... 68
3.2.2. “Intermediate” Variables ... 74
3.2.2.1. Managerial Perception of the Environmental Issue ... 74
3.2.3.1. Issue Legitimation ... 77
3.2.3.2. Environmental Employees Incentive System ... 81
3.2.4. Control Variables ... 84
3.2.5. Variables Correlations ... 85
4. Empirical Tests and Results ... 87
4.1. Determinants of Environmental Strategy ... 87
4.2. Determinants of Managerial Perception of the Environmental Issue ... 93
4.3. Indirect Effects of Environmental Accounting Systems on Environmental Strategy ... 102
4.4. Robustness Check ... 103
Conclusions ... 107
1
ABSTRACT
2
INTRODUCTION
In the last thirty years, the concepts of natural environment preservation and ecological development have increasingly become a dominant concern for multiple actors including investors, policy makers, non-governmental organizations (NGOs) and academics. Today, environmental issue is one of the central themes considered when analyzing economic and social growth, both in the academic world and in society. More specifically, climate change has gathered a growing attention also by intergovernmental organization, urged by environmental interest groups and the scientific community to embrace the cause of reducing global warming and the related greenhouse gas (GHG) emissions. Scientific data clearly show that global average temperature has increased by about 1.4°F (0.8°C) since 1880. Carbon dioxide emissions (CO2), the greenhouse gas mostly associated with global warming, are at their highest level in the last 650 years: 402.56 parts per million on a volume basis (ppmv). In this context, there is a growing consensus, among both management leaders and academic researchers, that sustainable development is the unique alternative to pursue. In management literature, climate change is identified as “one of the greatest challenges we confront in the 21st century”, since “organizations are […] critical to mitigating and adapting to climate change”.1
As a response to the pressures they are facing, corporations are increasingly identifying and addressing environmental issue as a strategic opportunity rather than a strategic threat. Indeed, a growing number of companies proactively manage and publicly report on their environmental projects and performance. Two are the fundamental rationales identified by the extant literature for organizational commitment to environment protection. On the one hand, external social pressure; in this perspective, firms pursue environmental sustainability to comply with green regulations, thus limiting the incurring in liabilities, and to avoid the deterioration of corporate reputation. On the other hand, a more business-based approach states that companies engage in environmentally responsible activities for strategic reasons, with the goal of maximizing their value-creation. Accordingly, the extant literature has widely underlined the economic and financial advantages of implementing green strategies. Firstly, they lead to an improved corporate image, opening new business and market opportunities. They help to accomplish cost reduction, which is driven not only by an increased efficiency in the use of resources, but also by the avoidance of compliance and liability costs, diminished long-term risks associated with resource depletion, pollution or waste management and avoidance of future clean-up costs or of losses in revenues due to
1 Howard-Grenville, J., Buckle, S. J., Hoskins, B. J., & George, G. (2014). Climate change and
3 customer boycotts. Moreover, several researchers have examined how the stock market positively reacts to improved environmental performance through market returns.2 However, to date, although the important implications of climate change for organizations have widely been acknowledged, the extant literature has made little progress towards providing an understanding about the mechanisms available for companies to achieve good environmental performance. The focus of research has been primarily on showing how the integration of environmental commitment in business can drive positive economic and financial results, besides an improved environmental performance. However, how to effectively implement this fruitful integration is still rather ambiguous. Many researchers and professionals highlight the difficulty for companies to incorporate green aspects into management processes and underline a divide between good intention and practice. Specifically, environmental accounting literature has widely focused on environmental reporting techniques, while less attention has been paid to the internal dimension of environmental accounting: environmental management accounting (EMA). In fact, there is still a lack of consensus on a general framework encompassing and identifying the whole set of EMA practical tools, although some guidance on these mechanisms has been developed. Moreover, and most importantly, effective execution of EMA systems among companies is still volatile. Some researchers ascribe this to the use of conventional management accounting tools, with no adaptation of them to environmental accounting aims. In order to understand and solve the poor effectiveness of EMA tools in driving environmental results, Burrit (2004) underlines how a different level of analysis, afferent to the individual and behavioral sphere, should be considered. Understanding how managers personally interpret the information from EMA systems, would help to gain a greater knowledge of EMA tools’ effectiveness and of their potential impact on managerial choices of environmental strategy. The aim of this work is to make a first step in this direction, in order to give a significant contribution to the literature and to promote the practical integration of EMA mechanisms within corporate traditional management accounting systems. More specifically, we develop a research framework, basing on Sharma (2000), that draws upon two streams of the research: environmental accounting literature and strategic issue management literature. The former, as just underlined, offers a guidance on the accounting and control tools that can be used to address the environmental matter, while lacking in the individual and behavioral elements analysis, that can potentially explain the volatile execution of such tools. The latter, instead, theorizes on how the cognitive interpretation of a strategic issue by a decision maker is influenced by the internal
2 Dowell, G,, Hart, S.L. & Yeung, B. (2000). Do Corporate Global Environmental Standards Create or
4
organizational context, and how it eventually affects corporate actions. Hence, it provides important insights on the potential role of managerial perception in the effectiveness of environmental accounting tools. However, strategic issue management literature does not deal, in its traditional development, with the environmental matter.
Linking these two streams of research, our investigation pursues a twofold objective, which embodies two important contributions to the literature. Firstly, it focuses on understanding whether specifically designed environmental accounting tools can drive the development of a responsive environmental strategy. Further, it tests whether, in this influence of the environmental accounting systems on green strategy, the individual element of managerial perception of the environmental variable plays the determinant role of intermediate element. In order to address these research questions, we test them over panel data set of 1296 firm-year observations, corresponding to 740 listed firms that, in the period 2011-2013, voluntarily reported their climate-change information to CDP. This investigation is developed, through the use of ordinary least squares (OLS) models, in two stages. In the first one, we test the influence of managerial interpretation of the environmental variable over corporate choices on environmental strategy. In so doing, we evaluate whether the assumptions of strategic issue management literature are still valid when they are applied to the environmental variable. Hence, we assess whether this innovative integration is a fruitful path to understand the differences among firms’ green strategies.
In the second stage of this investigation, we evaluate the influence of several, specifically designed environmental accounting tools on managerial perception itself. This will allow us to underline potential indirect relations between environmental accounting tools and corporate choices of environmental strategy, while assessing whether the individual element of managerial perception performs the intermediate role in this process. Finally, we check for the existence of direct relations between environmental accounting systems and green strategy, beside the indirect ones. This will lead us to underline that, in the impact of one environmental accounting tool on the environmental strategy, the managerial perception is the determinant, intermediate element, since no direct relations between those two factors exist. This research contributes to a deeper understanding of the effectiveness of environmental accounting systems in driving environmental results. Moreover, the importance of cognitive and behavioral factors in this process, only theorized by the extant literature, is empirically acknowledged.
6
CHAPTER 1
Environmental Accounting and Strategic Issue Management: an
Innovative Interplay to Manage the Environmental Variable
In the following chapter, two streams of literature are presented: Environmental Accounting, analyzed through its two components, and Strategic Issue Management, discussed in its principal characteristics. The research framework of this study draws from them both and links them, as it will be later explained.
1.1. Companies and Sustainable Development: the Rising of Environmental Accounting
The concepts of natural environment preservation and ecological development have become dominant in the last thirty years. Environmental issue is one of the central themes considered when analyzing economic and social growth, both in the academic world and in society. This growing commitment to the issue can be traced back to a widely accepted historical reconstruction, which underlines two consequences of the fast economic development occurred in the decades following the Industrial Revolution. On the one hand, economic growth momentum has caused a progressive reduction of the stock of natural resources. On the other hand, it has increasingly raised the attention to the environmental impact of production and consumption phenomena.3 This reconstruction necessarily leads to recognize a link between natural degradation and the activities of corporations at a micro-level. In this context, organizational commitment to environmental sustainability has sharply grown, becoming one of the critical issues within firms. Today, corporations have widely recognized the importance of structuring their own activities compatibly with the concept of sustainable development, defined in the Brundtland Report4 as the “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.5 Nevertheless, if it is true that the organizational focus on environmental sustainability is far
3 Donato, F. (2000). La variabile ambientale nelle politiche aziendali: sostenibilità economica ed
ecologica. Giuffrè, Milano.
4
The Brundtland Report was written by the World Commission on Environment and Development (WCED) in 1987, before its official dissolution. Known as the Brundtland Commission because of the name of the Chairman, it was established by the UN General Assembly to evaluate the degree of environmental deterioration and to unite countries to pursue sustainable development.
5
World Commission on Environment and Development (1987).Report of the World Commission on Environment and Development: Our Common Future. In:
7 more stressed today, it is also worth underlining that the reasons for green strategies go beyond moral factors and originate from several sources of rationale.6 It is possible to categorize them in two distinct kinds of reasons: external social pressure and internal business-related factors.7 These two rationales are respectively linked to two main theories in the academic research. The former presents a socio-political approach and identifies forces that are external to the organizations and that exert pressure for environmental commitment and thus create calls for green management. Such forces are mainly represented by environmental regulation and stakeholders concerned about the impact of corporate activities on the environment.8 The actual manifestation of stakeholder pressure can take multiple forms: from consumer preferences for green products and services, through the media attention to environmental damage, to rising community concerns for sustainable and responsible corporate behavior, to end with shareholders investment decisions that take into account environmental corporate management. Failing in either complying with the environmental regulation or engaging with external green-oriented stakeholders can not only deteriorate corporate reputation, thus potentially leading to a loss of sales9, but also can cause the incurring in liabilities and fines. Given this, the causal interdependence between the externally- and the internally- driven kinds of rationales for green strategies becomes clear: the sociopolitical external forces can lead to potential costs for corporations, should they fail to internalize such external calls for green commitment. Hence, sociopolitical pressures can actually have an impact on firms’ economic performance, thus reinforcing the business-related rationales for green strategies. Such rationales represent, as said before, the other category of reasons for corporate needs of environmental issue management. This second research theory is represented by academics that have developed an economics-related paradigm to shed light on the pressures drivingcorporate environmental behavior. Therefore, here the key elements acting as motivators for green commitment are no more external, but internal to the organization and business-based. The central hypothesis of this line of thought is that environmental commitment of firms is rewarded by the market in monetary terms.10
6 Derchi, G. B., Burkert, M. & Oyon, D. (2013). Environmental management accounting systems: A review
of the evidence and propositions for future research. In: Songini L., Pistoni A., Herzig C. (ed.). Accounting
and Control for Sustainability (Studies in Managerial and Financial Accounting, Volume 26), Emerald
Group Publishing Limited, 197 – 229.
7
Burritt, R. L. & Schaltegger, S. (2010). Sustainability accounting and reporting: Fad or trend?.
Accounting, Auditing, & Accountability Journal, 23(7), 829-846.
8
Parker, L. D. (2000). Green Strategy Costing: Early Days. Australian Accounting Review, 10 (1), 46-55.
9 Marcus, A. & Fremeth, A. (2009). Green management matters regardless. Academy of Management
Perspectives, 23(3), 17–26.
10
Schaltegger, S. (2011). Sustainability as a driver for corporate economic success. Consequences for the
development of sustainability management control. Centre for Sustainability Management, University of
8
Thus, companies decide to implement environmentally responsible activities as they recognize them as a source of value-creation, resulting in improved economic and financial performance, together with a strengthened environmental one. Much of the literature developing this hypothesis focuses on and empirically shows the economic and financial advantages driven by green strategies. One of the oldest reasoning supporting this approach assumes a production-based point of view and introduces the concept of resilience in an economics-based paradigm. This concept refers to an eco-system capacity to keep the level of productivity stable when pressures or shocks occur. When the resilience edge is exceeded, it means that the environmental impact and the withdrawal of natural resources by the economic system has destroyed the self-healing capacity of the eco-system. This situation necessarily leads to negative consequences not only for the natural environment, but also for firms themselves. The key element of this theory, in fact, is that nature should be considered a productive factor.11 Consequently, the relationship between companies and the environment is no more perceived as univocal, but mutual: if it is true that firms’ productive activities somehow alter the environment, it is also true that their short-term industrial policies, that exploit natural resources and badly impact on them, eventually harm the firms themselves.12 Other authors more directly analyze the economic benefits of environmental practices on firms’ economic performance. Firstly, corporate image and reputation benefit from a good green performance, which in turns leads to a potential increase in revenues by satisfying the needs of environmental conscious customers.13 This represents the second advantage of green strategies: they can be a determinant for new business and market opportunities, embodied by the growing number of green customers, willing to pay a premium price for more environmentally friendly products.14 Related to this, are the competitive marketing advantages: given the increasing consumers’ consciousness, green strategies – especially the ones leading to innovations in products with low environmental impacts – are likely to attract the media attention, for which high advertising expenditures would normally be necessary. Another advantage of green strategies underlined by many researchers is cost reduction. In fact, ecological improvements such as raw material reprocessing and reuse, energy conservation, waste reduction and a life-cycle approach can increase the efficiency of the
11
Catturi, G. (1990). Produrre e consumare: ma come? Cedam, Padova.
12
Mio, C. (2002). Il budget ambientale. Programmazione e controllo della variabile ambientale. Egea, Milano.
13
Shrivastava, P. (1995). Environmental Technologies and Competitive Advantage. Strategic
Management Journal, 16, 183-200
14 Epstein, M. J. (2008). Making sustainability work: Best practices in managing and measuring corporate
9 production process, thus reducing costs.15 Additional potential savings can be less tangible in the short-term, but with a high impact on firms’ performance. They are related to compliance and liability costs reduction, diminished long-term risks associated with resource depletion, pollution or waste management and avoidance of future clean-up costs or of losses in revenues due to customer boycotts. Moreover, long-term financial returns are increasingly dependent on corporate environmental responsibility as perceived by shareholders and community, since they are interested not only in the financial performance but also in the environmental one. Finally, the active implementation of green strategies leads to an important first-mover advantage. Developing new processes and products and acquiring organizational and technical capabilities before competitors or regulatory duties give the organization an important competitive advantage, at least temporary.16
So, basing on the analyzed literature, it is possible to maintain that any activity aimed at introducing the environmental issue within the set of variables considered critical in the organization is business-related in nature, because its rationale is to strengthen the competitive position of the company. In this context, there is a growing consensus, among both management leaders and academic researchers, that “…there’s no alternative to sustainable development”.17
Environmental issue is no longer considered only as an obligation from companies, but rather a critical factor to be included in the business strategy’s definition and implementation. Consistently, “corporations are seen to be identifying and proactively addressing environmental issue as a strategic opportunity rather than a strategic threat”18
, by increasingly collecting, using and distributing information related to their impact on natural environment. But if the necessity to account for the environment is by now widely recognized, the tools available to firms’ management for that purpose are far less defined. In other words, “it is no longer a discussion of why, what or whether to focus on sustainability, but how”.19
The discipline addressing this issue is represented by the environmental accounting. It can be defined as a specific section of social and environmental accounting, which instead focuses on the broader socio-ethical commitment of companies. In particular, environmental accounting is related to the development and analysis of the techniques aiming at collecting and measuring firms’ environmental information, to make them available for
15 Porter, M. E. & Van der Linde, C. (1995). Toward a new conception of the
environment-competitiveness relationship. Journal of Economic Perspectives, 9(4), 97–118.
16
Taylor, S. R. (1992). Green management: The next competitive weapon. Futures, 24 (7), 669-680
17
Nidumolu, R., Prahalad, C.K. & Rangaswami, M.R. (2009). Why sustainability is now the key driver to innovation? Harvard Business Review 87, p.57.
18
Parker, L. D. (2000a). Green Strategy Costing: Early Days. Australian Accounting Review, 10 (1), p.46.
19
Epstein, M. J. (2010). The challenge of simultaneously improving social and financial performance: New research results. In: M. J. Epstein, J-F. Manzoni, & A. Davila (Eds.), Performance measurement and
10
both internal managerial processes and external disclosure. Consistently, environmental accounting can be divided into two broad conceptual sections, as Figure 1 depicts: environmental management accounting (EMA), in the upper section, and environmental reporting, in the lower section, with the difference between them represented by the recipients of environmental information (external vs. internal actors), as the vertical axis of the figure shows. In fact, EMA is defined as the implementation of accounting tools for collecting and measuring environmental-related information with the aim of supporting internal business decisions; environmental reporting, instead, focuses on the external disclosure of these pieces of information.20 As Burrit et al. (2000) underline, this conceptual separation between internal and external accounting finds its reason in the fact that the level of detail, aggregation and confidentiality of information differ between management and other stakeholders’ needs.21 FIGURE 1. Environmental Accounting Systems.
Source: Modified from Bartolomeo et al. 2000, p. 33.
While considerable knowledge on corporate environmental disclosure practices is now available, the focus of researchers to the process of accounting information for internal decision-making and control systems has only recently developed. Moreover, it is following
20
Burritt, R. L. (2004). Environmental management accounting: Roadblocks in the way to green and pleasant land. Business Strategy and the Environment, 13(1), 13–32.
21 Burrit, R. L., Schaltegger, S. & Hahn, T. (2000). Environmental Management Accounting – Overview
11 multiple directions, with a consequent lack of common understanding for EMA practices. This imbalance should be solved, because if it is undeniable that accounting is necessary for reporting environmental costs and outcomes, it might be even more useful in ex ante, internal processes to manage the environmental variable. Furthermore, this lack of a standardized framework for EMA application makes it simpler and more immediate, for companies, to implement only sustainability reporting, without a well-structured environmental management system driving the decisional process. In this case, “these reports may serve as veils hiding activities, whose sole purpose is the reconstruction of an eroded legitimacy”22
. Hence, for sustainability to be really implemented, not only reporting is necessary, but also, and more importantly, an organizational strategic renewal and the implementation of EMA systems. All this given, in the following the two macro-components of environmental accounting are presented.
1.1.1. Environmental Management Accounting: State of the Art and Future Potential
EMA, as previously underlined, can be defined as the development and implementation of accounting practices aimed at identifying and measuring all environmental information to support internal business decisions. The already cited increased organizational focus on the environmental issue has caused a growing need and request of management control and performance measurement systems by managerial practitioners. They look for performing tools that could help them in accounting for the environment and thus fostering green management practices. Therefore, in the last twenty years, the accounting literature has increasingly made an effort in integrating the concept of environmental sustainability in accounting, in both the academic and the professional fields. Consistently, the majority of the work on EMA was published after 2000, indicating that the research commitment to the environmental matter is quite new. Despite this increased attention, two critic observations arise from the literature analysis: on the one hand, there is still a lack of consensus on a general framework encompassing and identifying the whole set of EMA practical tools; on the other hand, the actual difficulty that corporations face when integrating the environmental matter in business processes has been highlighted. In other words, effective execution of EMA systems is still volatile.23 Some researchers ascribe this to problems in both planning
22
Gond, J., Grubnic, S., Herzig, C. & Moon, J. (2012). Configuring management control systems:
Theorizing the integration of strategy and sustainability. Management Accounting Research, 23, p. 205.
23 Berns, M., Townend, A. Khayat, Z., Balagopal, B., Reeves, M., Hopkins, M. & Krushwitz, N. (2009). The
12
and execution, that are mostly seen to be caused by the use of conventional management accounting tools, with no adaptation of them to environmental accounting aims. Management accounting is defined as “the identification, measurement, accumulation, analysis, preparation, and interpretation of information that assist executives in fulfilling organizational objectives”24
, and in its conventional applications, it does not normally give explicit and separate recognition to company-related environmental impacts. Internal management accounting, in fact, is defined to be driven by external professional accountancy rules rather than by internal needs for relevant environmental information. In particular, several are the limits that prevent it from being a performing tool when the environment needs to be assessed within business processes. Firstly, environmental costs are accounted with an excessively low level of detail. In fact, indirect environmental expenses are normally lumped in with general business overheads and thus they are not accurately traced to specific products and services. Rather, they are allocated to cost centers and then to cost objects, indirectly and through a general absorption rate, which is not correlated to environmental sustainability measures, but is usually represented by a production volume index. This can lead to the under-costing of products with a heavy environmental impact, and thus to the cross-subsidizing phenomenon, where more eco-friendly productions are burdened by the costs of dirty products. The resulting cost information is thus extremely unclear and misleading, since it does not show how highly environmental-impacting production processes are more costly than the “green” ones. Tracing environmental costs to process, rather than hiding them in general overheads, would be a more effective implementation of management accounting, towards EMA.25 A lack of information for decision-making is also caused by the fact that green externalities are not accounted for. Moreover, performance appraisal mechanisms are built on financial accounting rules, thus resulting too short-term in focus to fully evaluate the environmental performance, that is multidimensional and long-term by nature. Also, the environmental dimension is generally not integrated in performance measurement and rewarding practices, so that the individual effort for sustainable development is often not measured and accordingly rewarded. This inevitably results in little motivation for committing to the environment during planning, implementation and control.
Besides these problematic aspects of conventional management accounting, the effective execution of EMA is also seen to be hampered by factors belonging to behavioral and
and the global thought leaders’ research project. MIT Sloan Management Review, Special report (September).
24
Horngren, C., Foster, G. & Datar S. M. (2000). Cost Accounting: A Managerial Emphasis. Prentice-Hall, Englwood Cliffs, NJ.
25 Carrera, R. M. & Iannuzzi, A. (1998). Getting Started with Environmental Cost Accounting.
13 cultural, rather than technical dimensions. Consistently, Epstein (2010) underlines the important impact of informal control systems, embodied by organizational culture, leadership and people, on green management execution. Skepticism caused by managerial inertia, lack of requisite skills and reluctance to change can heavily hamper the decision to adapt existing control systems to environmental concerns, and their effective implementation.
Moving to a deeper characterization of EMA, it is worth underlining that the definition of its boundaries has remained quite confused until recently, with an important contribution coming from the work of Burrit et al. in 2002. In the literature, in fact, EMA was defined in two different ways: in the first approach, it was seen to use only monetary measures and information for the internal environmental accounting; in the second approach, instead, both monetary and physical internal information are seen to be considered in EMA, with no analytical distinction between the two dimensions.26 Burrit et al. (2002) move from the awareness that a common understanding of both EMA and the related tools is necessary to foster its adoption, and propose a definition combining the two just cited approaches and a comprehensive framework on which to map EMA tools.27 Drawing from the second approach, this definition includes in EMA both the monetary and the physical dimensions, consistently with the wide consensus that there are two main groups of environmental impacts related to company activities: environmentally-driven impacts on the economic situation of companies (expressed in monetary terms) and company-driven impacts on environmental systems (expressed in physical terms). Anyway, a distinction is made between monetary and physical accounting, as suggested in the first approach, in order to define different conceptual tools of management decision making and accountability, that respectively use monetary and physical measures. So, this definition of EMA, as depicted in the upper section of Figure 1, is made up of two components: Monetary Environmental Management Accounting (MEMA) and Physical Environmental Management Accounting (PEMA). MEMA is the accounting tool for assessing the economic impact of the environmental issue on corporate activity and generates information for internal management use expressed in monetary units (e.g., expenditures for cleaner production; costs of fines for breaching environmental laws; monetary value of environmental assets). In terms of methods, MEMA can be considered as a further development of conventional management accounting systems, since it originates from these tools, that are extended and adapted for the environmental aspect of company activities
26
Bennet, M. & James, P. (1998). The Green Bottom Line. In: Bennet M., James P. (eds), The Green
Bottom Line: Environmental Accounting for Management, Current Practice and Future Trends, Greenleaf
Publishing, Sheffield, 30-60.
27
14
to be assessed. Also PEMA works as an information tool for internal management decisions, but it focuses on the company’s impact on natural environment, expressed in physical units. As components of EMA, they contribute to strategic and operational planning, by providing the main basis for decisions about how to set and achieve the desired targets and by acting as accountability and control devices.
On the basis of this, EMA is more specifically defined as the design and implementation of accounting practices that identify, collect and measure physical and monetary environment-related information to support day-to-day internal business decisions. it is like “simply doing better, more comprehensive management accounting while wearing an “environmental hat””28
. As already said, in Burrit et al. (2002), the authors also provide a prescriptive framework to identify EMA tools and how they can be useful for different business actors and in different decision contexts. These tools are categorized on the basis of not only the unit of measure used (MEMA and PEMA), but also of elements of time frame (future and past), length of time frame (short term and long term) and routines of information gathered (routine and ad-hoc).
Although several authors, besides Burrit et al. (2002), investigate on EMA tools and practices, a prescriptive and precisely defined set of tools is actually not available. In fact, while some authors seem to identify environmental cost accounting as the representative and almost unique EMA practice, in the research, multiple tools are defined as possible applications of EMA, from environmental investment appraisal to environmental budgeting; from material and energy flow accounting to environmental risk management; from environmental performance measurement to a balanced scorecard approach; from environmental target and standard setting to environmental employees rewarding.
Besides the just cited stream of literature analyzing the design of EMA practices and their level of diffusion across firms, it is possible to enucleate two other dimensions of analysis of EMA: the determinants of its adoption and its effects on organizational performance.
As for the first group, Frost and Wilmhurst (2000) report environmental sensitivity of the industry to be one of the factors contributing to the implementation of environmental cost accounting and management control practices, but not the only one influencing this choice.29 Expectation of stakeholders, together with political and social pressures and organizational factors are all seen as important determinants for environmental practices. Industry type and
28 UNDSD, United Nations Division for Sustainable Development (2001). Environmental management
accounting, procedures and principles, p.3. In:
http://www.un.org/esa/sustdev/publications/proceduresandprinciples.pdf.
29 Frost, G. R. & Wilmhurst, T. D. (2000). The adoption of environment-related management accounting:
15 stock-market listing are instead identified as elements influencing the choice of integrating environmental metrics in performance measurement systems.30
As for EMA effects, instead, the concept at the basis of their analysis is the one already underlined for the rationales of green strategy implementation: these practices are believed to result in an improved economic and financial performance.
From a theoretical point of view, the most widespread reasonings supporting this vision in EMA literature are several: firstly, accounting for the environment leads to the availability of relevant data that can help the managers to implement a more informed decision process, on the basis of the concept underlined by Epstein and Roy (1997) : “we manage what we measure”.31
A clear example of this advantage is represented by the uncovering of the environmental costs usually hidden in overheads. It leads to an improved quality of the information available for decision making and thus to a potential fostering of cost efficiency, compliance and liability reduction, that can be achieved by decreasing or eliminating such environmental costs, once they are traced.32 Moreover, a competitive advantage approach suggests that EMA can create an awareness that will potentially lead, on the one hand, to the identification of new business and market opportunities; on the other hand, to the transformation of the production process towards efficiency, thus reducing costs and wastes. Finally, EMA leads to the double advantage of supporting environmental protection, by helping the implementation of eco-efficient initiatives and, consequently, of improving the company’s image and relationship with stakeholders.
From an empirical point of view, several surveys and case studies in literature analyze the effects of EMA tools by attempting to show their relevance in helping organizations to foster both environmental and financial performance. In a number of studies, environmental performance and non-financial performance are found to be positively associated with, respectively, CEO’s remuneration levels linked to green targets execution metrics33
and the integration of environmental information in management control mechanisms.34 Environmental strategic planning is demonstrated to improve green economic performance35
30 Gates, S. & Germain, C. (2010). Integrating sustainability measures into strategic performance
measurement systems: An empirical study. Management Accounting Quarterly, 11(3), 1-7.
31
Epstein, M. J. & Roy, M. (1997). Environmental Management to Improve Corporate Profitability. Journal of Cost Management, January, p. 28
32
Cullen, D. & Whelan, C. (2006). Environmental Management Accounting: The State of Play. Journal of
Business & Economics Research, 4(10), 1-6
33
Campbell, K., Selfik, S. E. & Soderstrom, N. S. (2007). Executive compensation and non-financial risk: An empirical examination. Journal of Accounting and Public Policy, 26(4), 436–462.
34
Perez, E. A., Ruiz, C. C. & Fenech, F. C. (2007). Environmental management systems as an embedding mechanism: A research note. Accounting, Auditing & Accountability Journal, 20(3), 403-422.
35 Wisner, P. S., Epstein, M. J. & Bagozzi, R. P. (2006). Organizational antecedents and consequences of
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and environmental performance.36 Moreover, environmental cost accounting systems and their extent of use are found to stimulate process innovation level.37
On the basis of what has been presented, it is possible to say that environmental management accounting appears to be, somehow, a reinvention of management accounting. As such, it has largely been presented in a technical way and basing on economic theories. This is considered, by a number of researchers, a gap in the literature, that should be addressed through further studies and that, as we will see later, is one of the elements at the basis of our research hypothesis. What needs to be analyzed, are alternative theoretical assumptions and different levels of analysis, to shift the focus from economic theories and organizational levels to behavioral models and individual perspective. Consistently, Burrit (2004) underlines that it is believed that EMA has at its disposal “the right tools to motivate managers commitment to implement and stimulate positive attitudes towards “green” initiatives, but it might not produce the expected results due to behavioral problems”. He also wonders whether these application breakdowns could be solved through “top management commitment to environmental goals and support for implementing an environmental responsibility accounting system where clear areas of responsibility for environmental impacts are defined; managers being involved in formulating the targets for which they will be held responsible; and the introduction of positive incentive system to reward target achievement, rather than conventional negative information produced by conventional budgetary control systems”38, or whether a radical change in leadership and control is needed to encourage environmental conservation. So, accounting researchers could complement existing EMA knowledge by analyzing how managers individually use environmental accounting information to make green decisions and how to design and use green management control tools to shape the managers’ choices for green management execution.
1.1.2. Environmental Reporting: State of the Art and Future Potential
The second component of Environmental Accounting is the external disclosure of environment-related organizational information: environmental reporting. These pieces of information are generally jointly reported with social and sustainability data, hence environmental reporting is often included in the wider denominations of corporate
36
Henri, J.F. & Journeault, M. (2010). Eco-control: The influence of management control systems on environmental and economic performance. Accounting, Organizations and Society, 35(1), 63–80.
37
Ferreira, A., Moulang, C. & Hendro, B. (2010). Environmental management accounting and innovation: An exploratory analysis. Accounting, Auditing & Accountability Journal, 23(7), 920-948.
38 Burritt, R. L. (2004). Environmental management accounting: Roadblocks in the way to green and
17 responsibility (CR) or sustainability or triple bottom line (TBL) reporting.39 In particular, the third concept was developed by Elkington (1999) and presents an even wider scope of reporting, with the inclusion of corporate economic impacts besides the environmental and social ones, that are representative of a sustainability report.40 It is possible to assess that the research on environmental reporting has flourished before the EMA one and that, as already underlined, the common knowledge on disclosure practices is deeper and more developed than management accounting tools understanding. This is probably due to the fact that, by nature, reporting is simpler to standardize, at least in the formal dimension, than management accounting techniques. Moreover, from a research standpoint, organizational disclosures are more immediately and objectively analyzable, while the internal dimension of management accounting processes is far more complex to assess and thus to study. Also for this reason, statistics on the diffusion of environmental reporting practices, which will be later presented, are simpler to find in the research field. Nevertheless, there is still room for academic and practical research on environmental reporting. In particular, future studies could follow two different paths in order to solve reporting knowledge gaps. On the one hand, concerns remain about the credibility of corporate environmental reports and the rationales of managers developing them.41 In other words, the duality between environmental disclosure as a mere public relations exercise or as the concrete external side of a credible accounting system should be further analyzed. On the other hand, far more research is needed on what is considered the future of reporting: integrated reporting. In fact, its meaning is still evolving and, although a framework has recently been developed to provide companies with guidance, its adoption remains limited.42 Integrated reporting consists in developing only one comprehensive document in which to disclose both the financial and the social-environmental results of a corporation, instead of separating sustainability report from the mainstream financial report. For the purpose of this work, integrated reporting, together with the duality between voluntary versus mandated environmental reporting, will be examined in the next chapter. In the following, the level of diffusion of environmental reporting, the more widespread standards, the rationales and the advantages of environmental reporting are examined.
The starting point to understand the development of environmental reporting is, as for EMA,
39
For this reason, in this work these 4 denominations will be used indifferently to indicate Environmental and Social Reporting.
40 Elkington, J. (1999). Triple bottom-line reporting: Looking for balance. Australian CPA, 69 (2), 19–21. 41
Adams, C. A. (2004). The ethical, social and environmental reporting—Performance portrayal gap.
Accounting, Auditing and Accountability Journal, 17(5), 731–757.
42 Adams, C. A. & Frost, G. R. (2008). Integrating Sustainability Reporting into Management Practices.
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its socio-economic contextualization. With the economy becoming more knowledge- and information-based rather than machinery-based on the one hand, and with the environmental issue gaining always more prominence on the other hand, criticisms to financial reporting have become more frequent over the past 20 years. The growing importance of intangible assets and of organizational sustainability information that are not captured on the balance sheet, in fact, is increasingly seen as a failure of financial reporting to perform its information function in the actual context. It has been generally accepted that, in order to be competitive in the long run, corporations need to go beyond the quarterly financial results. Sustainability reporting aims at filling this gap and, while once it was typical of a few unusually green or community-oriented companies, today it is considered a best practice employed by companies worldwide. Consistently, the ninth edition of KPMG’s Survey of Corporate Responsibility Reporting shows a high rate of CR reporting implementation. The survey refers to the G250 companies – the world’s largest companies by revenue – and to the top 100 companies of each among the 45 countries analyzed: N100 (a total of 4,500 companies). In particular, as Figure 2 shows, CR disclosure practice has deeply grown over the last 20 years and is implemented today by 73% of the N100 and 92% of the G250. KPMG also underlines that overall, although this growth has continued between 2013 and 2015, its rate has slowed down, suggesting that future increase in CR reporting is likely to occur in smaller increments unless driven by mandatory reporting legislation. From a regional standpoint, as depicted in Figure 3, Asia Pacific has risen to become the leading region for CR reporting over the last four years, from a position lagging behind other regions with a 2011 reporting rate below 50%, to 79% in 2015. It is followed by the Americas (77 %) and then Europe (74%), whose ranking (3rd) is due to a significant difference in reporting rates between Western European (79 %) and Eastern European companies (61%), with the latter reducing the average European CR reporting rate. Interestingly, the situation is reversed when analyzing the more specific practice of Carbon Reporting, with Europe ranking first (93%), followed by Americas (80%) and Asia Pacific (74%).43
43 KPMG. (2015). Currents of change: The KPMG Survey of Corporate Responsibility Reporting, in
19 FIGURE 2. CR reporting rate, by year.
Source: KPMG Survey of Corporate Responsibility Reporting 2015.
FIGURE 3. CR reporting rate, by region.
20
As firms worldwide have embraced sustainability reporting, the most widely adopted framework has been the one created by the Global Reporting Initiative (GRI). GRI was founded in 1997 with the aim of developing globally applicable guidelines for reporting of corporations, governments and NGOs. GRI’s sustainability reporting Framework, first published in 2000 and now in its fourth version (G4), provides a robust guidance for disclosure on sustainability performance. The working groups that draft it are composed of corporate representatives, NGOs, labor groups and society at large. By continually revising its standards through a broadly consultative global process to meet evolving environments, the GRI has created the first global framework for comprehensive sustainability disclosure and has established itself as a leader in reporting standards.44 A study on sustainability reporting published by the joint effort of The Boston College Center for Corporate Citizenship and Ernst & Young LLP in 2013 reports data from GRI Sustainability Database, on the growing trend of GRI sustainability reporting. As Figure 4 shows, in particular, the trend of GRI standards use for sustainability reporting has been increasing since 2000, with an average growth of more than 30% every year between 2007 and 2011. Moreover, the before cited study by KPMG maintains that, in 2015, 60% of all N100 and 74% of the G250 use the GRI framework for their sustainability reports.
FIGURE 4. Growth of sustainability GRI reporting, 2000–2011.
Source: EY & Boston College Center for Corporate Citizenship, Value of Sustainability Reporting.
44
Ernst & Young LLP & Boston College Center for Corporate Citizenship. (2013). Value of sustainability
reporting. In:
21 The GRI framework contains three main elements: sustainability reporting Guidelines, Protocols and Sector Supplements. The Guidelines are broadly relevant to all organizations regardless of size, sector or location and identify the indicators and the standard disclosures that companies should report. Consistently with the concept of TBL, they are divided in three categories of indicators: economic, environmental and social. Protocols explain each indicator of the Guidelines and the compilation methodologies, while Sector Disclosures address the gaps caused by the one-fits-all approach of the Guidelines, by complementing them with sector specific sustainability issues.
The just cited widespread implementation of environmental reporting has been widely analyzed in its rationales. In the literature, external pressure for environmental impact transparency and data reliability is defined as the principal driver for corporate implementation of sustainability reporting. Such pressures arise from the most diverse audiences: from the environmental groups, the media and the scientific community, to the companies’ stakeholders like investors, clients and suppliers.45
On the basis of this, several studies describe the legitimacy theory as an explanatory concept for environmental reporting, posing that social disclosure is motivated by the corporate need to legitimize activities. But besides the situation in which corporate activities are effectively oriented to sustainability, environmental reporting could also be used to divert attention from adverse environmental situations.46 Consistently, several works adopt a legitimacy theory approach to explain the companies’ use of external reporting as a tool to reduce exposure to the social and political environment as opposed to a means for signaling a proactive strategy towards green objectives, otherwise unobservable.47
Whatever the managerial reasons to implement environmental reporting, several are its benefits for organizations identified in the accounting literature. Firstly, an enhanced corporate image and trust of all company stakeholders is underlined. Given that customers, shareholders, suppliers and communities call for more transparency, in fact, environmental reporting isundoubtedly seen as a step forward in organizational sustainability commitment, that can improve the trust and loyalty of those outside the corporation. On the basis of this, companies that fail to disclose their environmental and social impact can face serious business consequences. In fact, on the one hand, not reporting does not mean to hide potentially bad
45
Lamberton, G. (2005). Sustainability Accounting – A Brief History and Conceptual Framework.
Accounting Forum, 29, 7-26
46 Wilmshurst, T. D, Frost, G. R. (2000) Corporate environmental reporting: A test of legitimacy theory.
Accounting, Auditing & Accountability Journal, 13 (1), 10 – 26.
47
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environmental data for companies. Subpar environmental performance has become hard to hide at present, because of the attention given by the media and the society to sustainability commitment and because of the influent opinions of many environmentalists groups, which can seriously threaten companies’ reputation. On the other hand, without reporting, companies can miss the opportunity to attract new customers by positively shaping their image. Beyond these benefits of greater accountability and thus enhanced corporate image, reporting can also help the internal strategy formulation. The necessary data collection, in fact, requires a careful tracking of the environmental impact, which can help organization to manage climate change challenges.48 Finally, but not less importantly, many studies underline how environmental reporting boosts company valuation and thus promotes its access to finance, since it reduces investors’ uncertainty.49
Corporate transparency and communication with stakeholders, together with the possibility to clearly evaluate environmental risks, in fact, have been identified as one of the most relevant aspects investors monitor in their decisional process.
1.2. Strategic Issue Management: How Cognitive Categorizations Affect Organizational Decision Making
Strategic issue management literature is not a newly developed research field – the first studies date back to the seventies – but it analyzes a topical matter for organizational theories. That is, how strategic issues are interpreted by the people held responsible within corporations and how, in turns, these interpretations result in organizational responses and activities. The very starting point of this stream of literature is said to be the two assumptions underlying organizational research: on the one hand, that the short- and long-term performance of firms is partly determined by the actions they implement in response to their external environments; on the other hand, that these organizational actions are partly dependent on the behaviors of individuals in the organization, especially the top-level decision makers.50 Moving from these considerations, strategic issue management researchers study how individuals’ cognitive representation of the external context is developed and its link with subsequent organizational actions. To do so, the dominant approach is to integrate an interpretive view of organizational decision making with cognitive categorization theory. Hence, before analyzing the resulting
48 Porter, M. E. et al. (2007). Climate Business | Business Climate. Harvard Business Review, 1-17. 49
Cheng, B., Ioannou, I. & Serafeim, G. (2014). Corporate Social Responsibility and Access to Finance.
Strategic Management Journal,35 (1), 1-23.
50 Child, J. (1972). Organizational structure, environment and performance: The role of strategic choice.
23 model, it is worth presenting briefly the categorization theory, that is the starting point of strategic issue management theory.
1.2.1. The Starting Point of Strategic Issue Management: Categorization Theory
Categorization theory falls under the umbrella of cognitive theories, that identify schema as tools used by individuals to understand and simplify their world. In the specific case, schema, that describe how data are stored in memory and used to codify different situations, are represented by categories. In particular, categorization theory describes the development and use of categories by individuals to organize their natural and social worlds. This theory was initially developed by Rosh (1975) as an explanation of the cognitive process at the basis of the concept formation for natural objects.51 Following this initial direction, most research on this theory has focused on the categorization processes implemented by individuals to understand and interact with the natural world. Some attention has also been paid to the categorization of social objects, situations and events.52 The ambiguity intrinsic to social phenomena makes their categorization more complex but also more powerful, since the labeling and simplification of elements is said to have the greatest effect when applied to ambiguous stimuli, like the social ones.53 Whatever the application field of categorization theory, its critical assertion is, as just underlined, that people develop cognitive categories on the basis of their observations of objects’ features and use such categories to organize their world. Hence, the category is the basic element of this theory and it is defined as composed by elements that are similar but not identical. In particular, they share some common attributes, bur are also differentiated by dissimilarities. Given this, a prototypical category member is defined as an element characterized by the common features shared by all the other category members. Such features of the prototypical member that, by definition, differentiate categories, are said to have high cue validity by Rosh (1975).
Advocates of the categorization theory claim that the individuals’ use of categories to interpret situations has a double rationale, respectively addressing the personal and societal spheres. In fact, on the one hand, categories are developed by individuals to reduce the complexity of phenomena they have to deal with, by organizing elements into meaningful groups; on the other hand they are useful in day-to-day interactions among individuals,
51
Rosch, E. (1975). Cognitive reference points. Cognitive Psychology. 1, 532-547.
52
Tversky, B., & Hemenway, K. (1983). Categories of environmental scenes. Cognitive Psychology. 15, 121-149.
53
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because the information summarized by a category label are shared by community members.54 A step forward in the development of categorization theory has been the analysis of the consequences of cognitive categories’ creation, that are represented by effects on individual behaviors. In particular, once categories are created, three cognitive phenomena are likely to happen. Firstly, memory for category-consistent information is stronger than memory for category-inconsistent information. Whether this happens because inconsistent information is unnoticed or simply forgotten, the result is that, once an object is categorized, its cognitive representation developed over time is inaccurate and simplified. In fact, it is built by considering only the information that confirm the already defined categorization of the object.55 The second and the third effects can be described as a unique error consequent to cognitive representation. More precisely, in both the situations in which new information about an element is either incomplete or ambiguous, it is likely that this gap or ambiguity will be filled with information consistent with the already defined category. In other words, people are led to infer the presence of attributes typically associated with category members, when the available information is incomplete or ambiguous.
These assertions are of high importance for behavioral studies, since they acknowledge the power of categorization to lead individuals adjusting and distorting both new (ambiguous or incomplete) and old information, so that the initial categorization of a given object is likely to be inaccurately confirmed over times. Although social psychology is the most developed and, at a first sight, suitable application field of categorization theory, it widely helped also organizational scientists’ understanding of leadership.56
Following this cross-fertilization between cognitive psychology and organizational theory literature, Dutton and Jackson (1987) posit that “a natural extension” of categorization theory is “applying it to the study of how [organizational] decision makers label, interpret, and respond to strategic issues”57
. In the following section, the model developed in their work, that embodies the representative theory for strategic issue management, is presented.
54
Cantor, N., & Mischel, W. (1977). Traits as prototypes: Effects on recognition memory. Journal of
Personality and Social Psychology, 35, 38-48.
55 Alba, J. W., & Hasher, L. (1983). Is memory schematic? Psychological Bulletin, 93, 203-231. 56
Phillips, J. S. & Lord, R. G. (1982). Schematic information processing perceptions of leadership in problem solving groups. Journal of Applied Psychology, 67, 486-492
57 Dutton, E. J. & Jackson, S. E. (1987). Categorizing Strategic Issues: Links to Organizational Action.
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1.2.2. Linking Cognitive Categorization to Organizational Decision Making: Strategic Issue Management
Strategic issue management, as already underlined, conceptualizes on the relationship between the categorization of strategic issues by decision makers and the organizational action implemented. The model is developed through applying categorization theory to corporate strategic issues and through integrating this with an interpretive view of decision making. The resultant is a three-steps model explaining the process going from the identification of strategic issues to the implementation of organizational actions.
The first phase of this theory has strategic issues as its central element, since it deals with their identification and subsequent categorization. Strategic issues are defined as events, developments and trends that affect an organization as a whole and that arise either from changes inside the firm or from external matters. However, not all these events represent strategic issues, but only the ones that are perceived by the organization’s members as having potential consequences on the achieving of organizational objectives.58 This element of subjective perception is integrated in strategic issues’ definition because they do not appear in objective, prepackaged form; rather, they are a continuous stream of ill-defined events, among which only some are identified and selected as strategic by decision makers. In this selection process, personal information capacity limits, together with individual and organizational filters, play an important role. Individual filters may be represented by past experiences, such as functional training, while organizational ones are embodied by corporate strategy, structure and systems. Once an issue has penetrated such filters, it is categorized. Here, the application of categorization theory to organizational strategic issue is implemented, by restricting the definition of the subject of the theory – from a general individual to the organization’s decision maker – and of the object of the theory – from a natural or a social element to the strategic issue –. The cognitive categorization of strategic issues, as already underlined in the case of a general object, has the double aim of helping the decision maker to store information more efficiently and of aiding communication with other organizational members. The extant literature on strategic management has identified two typical categories with which strategic issues are associated and labeled: threat and opportunity. These labels capture top managers’ beliefs about the potential effects of strategic events and trends and set in motion processes that lead the organization towards a specific direction.59 Three are the dimensions along which the research has theoretically and empirically defined threat and opportunity:
58
Egelhoff, W. G. (1982). Strategy and structure in multinational corporations: An information processing approach. Administrative Science Quarterly, 27 (3), 435-458.
59 Dutton, J. E., Fahey, L., & Narayanan, (1983). Toward understanding strategic issue diagnosis. Strategic
